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Companies can use today’s sluggish economy to their advantage by adopting a deliberate cost-focused mindset that will help them thrive in good times and bad
After more than five years of post-recession growth, many businesses are grappling with a slowing global economy and market conditions that are driving down demand for their products and services.
But there is an upside to the downturn. As they work to survive – and even thrive – in this challenging environment, some companies are shifting focus toward a critical aspect of business that’s often overlooked in good times and reactively managed when things go south: cost reduction.
“Never waste a crisis for the opportunity it affords to improve performance,” says Adam Crutchfield, a Calgary-based Consulting Partner at PwC Canada. “During down times, this means being able to look at how you can manage your bottom line effectively so you can continue to grow and avoid hurting the parts of your business that are your most profitable, strategic and differentiated.”
Cost versus profit
As the domestic and global economies continue to soften, more companies are looking at how they can preserve profits in the face of little to no growth. Steven Tanzi, a PwC Canada Consulting Partner in Calgary, points to Canada’s oil and gas producers as examples of businesses that are focusing on cost control as a result of market conditions.
Plummeting oil prices, driven in large part by a glut in the world supply, have been cutting revenues and eating into profit margins. At the same time, operational and go-to-market costs remain high for oil companies.
“The processes, mindset and culture in the oil and gas industry have really been focused on the revenue side of the business, and thinking about costs just doesn’t come naturally,” Tanzi says. “But if you look at the big players upstream, midstream and downstream, they’re now all looking at their cost base.”
Effective cost control involves more than cutting back on spending, say Crutchfield and Tanzi. As a first step, business leaders need to truly understand the cost and profit sides of their operations and what makes their company different and more compelling than the competition.
“It’s important to understand how you make a profit regardless of the environment and to commit to aggressively tackling the cost part of your business,” Crutchfield says. “In areas of your business where you’re losing money, your number one priority should be to shut off the tap of loss as fast as you can while making certain that you are not impacting profitable and strategic areas of your business.”
Analyzing all of the costs that drive profit is critical, Crutchfield advises. Regardless of market conditions, costs are an investment in company’s future, and it’s important to invest in areas that drive the business forward. “This is where you look at the complexities you’ve built into your business that are nice to have in a high-profit environment but are not necessarily required in times of low profits,” Crutchfield says.
Controlling costs is particularly important in industries where price and demand tend to fluctuate based on market forces beyond the company’s control, note Crutchfield and Tanzi. By focusing on costs, these organizations are directing their efforts toward operational areas where they can impact profitability, gaining a greater sense of control in the process.
From spending to saving
When it comes to cost control, the biggest challenge for many businesses is deciding to make the change from being revenue-driven to cost-focused.
“They don’t recognize the situation quickly enough,” Tanzi explains. “By the time they do, it’s usually not too late, but it’s almost too late – the bank account has dwindled too much. In my mind, the single biggest issue is deciding to make the switch from spending money to make money, to saving money to preserve and increase profits.”
Crutchfield and Tanzi say a large part of the cost reduction initiatives they undertake with clients involves driving cultural change so that everyone in the organization – from the C-suite to the frontlines – understands how their decisions and actions affect their company’s cost and profit numbers.
Both agree that enabling a culture of continuous improvement that encourages all employees and management to identify opportunities, question the status quo and improve performance is critical at any time. But when cost controls become the focus, a culture like this can help to mitigate their impact and counter the prevalent belief that such measures necessarily translate into job losses.
To support this cultural change, companies need information and tools that help them to ensure the decisions they make are profit-focused and in line with the overall business strategy.
“One of the things businesses struggle with is a lack of real-time information,” Tanzi says. “Fundamental reporting is typically backward-focused, making it hard to forecast accurately. We believe one of the key factors in controlling costs is being able to access and understand good cost information.”
Companies that take action today to manage their costs will realize many benefits in the short and long term, including greater cost efficiency, opportunities for growth or the consolidation of competitors through acquisition. These agile businesses can also expect to be ahead of their remaining competition when the economy rebounds.
“When market conditions do improve, businesses that take advantage of the opportunity to optimize and embed a culture of deliberate cost management will emerge stronger, more profitable and ready to respond to their customers’ needs,” Crutchfield says.